Question 1 - Understanding NPVMarks 50%

The CEO of Fosters (Daniel Andrews) is considering the acquisition of a new project known as Heineken. Daniel needs your advice as a chief financial officer (CFO) on the new acquisition using NPV analysis.

A feasibility study has been undertaken at the cost of $750,000 which has indicated that the project is technically feasible.

Heineken is priced at $15 million, and the acquisition would require:

$3 million in transportation costs

An installation cost of $2 million.

Initial working capital required for the project of $500,000.Assume a cash outflow in Year 0, and this is refunded back to Fosters at the end of the 8 year period.This assumes when the business is closed down at the end of Year 8, the working capital (accounts receivable plus inventory minus accounts payable) will be all converted into cash.

Heineken has a useful life of 8 years and will be depreciated using straight-line depreciation over 5-years.

It is expected to have a salvage value of $100,000 at the end of 8 years.

Heineken estimates for the 8 years that the following cash inflows and outflows for the business:

Revenue of $8.5 million per annum

Operating costs by $1.5 million per annum

The marginal tax rate is 30 precent.

The CEO advises you the company's cost of capital assumption is 15 precent.

Would you go ahead with the new acquisition using NPV analysis?

Explain your recommendation in a 100-word proposal to the CEO.

Required:

(1)Prepare an 8 year Income Statement Summary using the above information for the new Heineken Business, including depreciation and taxation (25 marks)

(2)Prepare a cash flow summary, based on the Income Statement.Using Excel or a financial calculator to calculate the Net Present Value of the Project cash flows. (15 marks)

(3)Prepare a 100-word summary explaining your recommendation on the acquisition. (10 marks)